"And if I laugh at any mortal thing,
'Tis that I may not weep."
--Lord Byron

Sunday, April 10, 2011

Fracking Frackers.

As a well-informed citizen, Gentle Reader, you are no doubt aware of the state of Texas’s budgetary crisis that’s going to cost, among other things, somewhere in the vicinity of 100,000 jobs in the public education sector so we can maintain a “favorable business climate,” or whatever new euphemism Governor Perry is using for “screw everybody but my fat-cat campaign contributors.”

The newest revelation about the true nature of the deficit suggests, unsurprisingly, that Big Energy is not only making obscene profits with little if any regard for trivial inconveniences like groundwater contamination bad enough to set tap water on fire, but they’re apparently gaming the system to avoid literally billions of dollars in taxes. Indeed, a report commissioned by the Texas Legislative Budget Board but oh-so-conveniently not published—the decision to publish or not is made by the “leadership” (Lieutenant Governor and Speaker of the House), not the staff—shows that there has been some pretty shady stuff going on. The result is that a tax of 7.5% of market value has, because of “deductions, exemptions, and rate reductions,” actually generated a yield of only between 1.1 and 1.9%, or somewhere in the vicinity of a quarter of what would otherwise have been owed.

The most significant part of this discrepancy was in a tax benefit accruing to “high-cost operations.” The original rationale for this incentive makes perfect sense: encouraging companies to drill in places they otherwise might not, thereby creating a win-win: the company hires more people, makes more money and can keep more of it; the state collects a lot of tax revenue, even at a reduced rate, when there may not have been a well at all otherwise.

Problem is (quoting from the report):

• High-cost natural gas well certifications are based on 30-year-old production definitions that rely on the type of gas produced and manner of production rather than the actual cost to drill. In fiscal year 2009 this resulted in the certification of a $24,000 gas well as a high-cost operation when the median drilling cost was $2.3 million….

• During fiscal year 2010, the State Auditor’s Office documented multiple instances in which tax audit processes did not prevent taxpayers from claiming rate reductions in excess of statutory limits. The Comptroller of Public Accounts later reported 357 natural gas wells had exceeded maximum rate reduction caps.

• [High-cost gas tax rate reductions are projected to account for] state revenue losses of $7.9 billion through 2019, from just the wells drilled in 2009.

The exact ratio of how much of the lost revenue is the result of actual criminality as opposed to simple corruption of the political process is unclear. What is evident is that the natural gas industry, with the active collusion of the state government, is getting enough in tax breaks at the expense of the rest of us to make a serious dent in the deficit. Ultimately, it matters little how Halliburton (to pick one such corporation at something short of random) harvests its taxpayer rip-off: by breaking laws it knows won’t be enforced, or by buying politicians who will do its bidding and legalize that which should be criminal.

To say that I am not a geologist or a tax accountant is rather like saying that water is wet… or that fracking isn’t worth the risk, at least at current technology levels. But it doesn’t take a lot of discipline-specific expertise to figure out what to do: 1). review the current policy, making appropriate accommodation for actual entrepreneurship, but ensuring that multi-billion dollar corporations aren’t screwing the rest of us (again), 2). actually enforce whatever the revised law does decree (collecting what's already owed wouldn't be a bad idea, either), 3). remove the TLBB from partisan control so they can and will release reports like this one, which they claim is an “internal working document,” not even subject to the Open Records Act.

There are legitimate concerns, expressed for example by commenter “L Streets Resident” on the excellent blog post by Jim Schutze on the Dallas Observer site, that a too-precipitous change of policy might turn out not to be cost-effective, costing more in jobs than it would generate in revenue. Perhaps. And Schutze no doubt exaggerates the situation: $8 billion over several years is different from $8 billion right now. But the energy industry’s defenders can’t seem to wrap their head around the idea that, say, cutting a third of the state’s teaching jobs might also have some significant negative repercussions extending well past the immediate families of the laid-off educators themselves.

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